Although concerns about U.S. inflation have eased in the market, Bank of America pointed out in a report on Monday that the upcoming November CPI data may have a bigger impact on U.S. stocks than investors expect.
The U.S. November CPI report will be released on Wednesday. Economists expect a year-on-year CPI growth rate of 2.7%, slightly higher than October's 2.6%.
Bank of America strategists stated that this inflation data may be particularly influential for U.S. stocks after the market's muted reaction to CPI readings over the past few months.
According to the bank's data, ahead of the latest inflation update, options pricing suggests that the S&P 500 index will see a 0.64% move on Wednesday, which would be the smallest CPI-related movement since inflation began rising in 2021.
Despite a decrease in market concerns about U.S. economic growth since the summer, inflation seems to be gradually rising again. Bank of America strategists mentioned the Bloomberg Inflation Surprise Index, which measures the difference between actual inflation data released and market expectations. This index shows that the latest inflation data is much higher than expected, marking the most significant surprise since May.
Bank of America's strategists said, 'In this context, we believe the two significant events remaining this year (CPI and FOMC meeting) can set the short-term direction for the market. A milder data could clear the path for a year-end rebound in U.S. stocks, as the second half of December is usually the second strongest period of the year.'
The strategist added, 'Conversely, stronger CPI data may reignite volatility, especially following a 5% rebound in U.S. stocks after the election.'
More importantly, the inflation data will influence the Federal Reserve's next interest rate decision. If there is an upside surprise, it is likely to increase the chances of the Fed pausing the rate cut cycle sooner.
Bank of America added, 'We believe the CPI data will be mild enough to confirm a rate cut in December. Due to the uncertainty of the policy outlook, a stronger-than-expected report might lead to more rate cuts being priced out, while a milder-than-expected report could lead to more rate cuts being priced in.'
According to the CME Group's FedWatch Tool, the market expects about an 86% probability that the Fed will cut rates by another 25 basis points at next week's meeting.
However, the uncertainty surrounding the Federal Reserve's interest rate path next year is greater. The likelihood of another rate cut in January has fallen to about 22%, while the probability of holding steady is 67%.
This article is reposted from: Jinshi Data